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Issues faced by the economy

Discuss about the Environmental and Natural Resource Economics.

The changes in the economic factors affect the overall economy to a great extent. When the economy faces one of the economic crises, it has been observed that other issues come up in the economy. The productivity of a country is considered to be one of the important factors that help to determine the economic position of the country in other countries. Thus, the sluggish productivity growth is considered to be an economic crisis that needs to be addressed effectively. Among the various issues, the main issue that has been a concern for Singapore is the poor productivity growth of the country. The recent years have witnessed fall in the productivity and failure in the efforts to increase the productivity rate. However, the analyst of the economy states that the economy is to face the issues in the next few years yet, as there is the least chance for the growth rate to increase. One of the major reasons behind such a scenario is the decline in the global growth rate, the increase in the aging population and the rigidity in the financial conditions during the beginning of the interest rate hiking cycle in the United States.

The article deals with the productivity growth slug in Singapore. The main concern of the report is to focus and discuss the slow global growth, the aging population, and the US rate hike. The report discusses that the economy of Singapore has relied less on the foreign labor while putting their effort to increase the productivity growth from 2 per cent to three per cent. There has been a significant fall in the percentage since the beginning of reconstructing efforts.  This indicates further fall in the productivity growth level and the other economic issues in future.

The report thus discusses the issues that the economy of Singapore has been facing in the recent years. The aim of the study is to set a relation between the various economic models and concepts and the economic event. The causes of the issues in Singapore are discussed along with the impacts to understand the importance of productivity growth of an economy using economic models, diagrams, and theories. Moreover, the government policy considered by the economy is discussed to address the issues. 

The cause of the stunted growth of the economy of Singapore has been due to the failure of the reconstruction drive to boost up the growth of the economic productivity. In the opinion of Tietenberg & Lewis (2016), the implementation of the different schemes that could help the organizations to improve their productivity has not been effectively carried out. Moreover, the firms in Singapore that were smaller in size had faced more difficulties in making an investment in the work activities in order to sustain in the market as the cost started to increase while the restructuring of the economy began. On the other hand, the difficulty in the economy was added because of the restructuring efforts of the foreign demand. The net export forms 20 to 30 percent of the real GDP, and hence it becomes difficult for Singapore to decouple totally from the flexibility in the foreign demand. Ehrenberg & Smith (2016) mentioned that the barriers restricted the organizations to increase their prices in order to gain back more profit margins. On the contradictory De Grauwe (2016) stated that in spite of effective outcomes there are chances of lowering of the economic growth further as the rise in the cost of unit labor will raise the price level automatically and thus causing stagflation or inflation has argued it.

Impact of the issues

The above figure signifies a situation of cost push inflation. It occurs in the economy when the firms operating in the market tries to respond to the rising cost by increasing the level of price for the goods and services sold by them. Such a step is taken by the firms to protect their individual profit margins. The inflation can arise due to the increase in the unit labor cost, the increase in the cost of raw materials, depreciation in the exchange rate that causes the import cost to rise and the increase in the business taxes (Balatsky & Ekimova, 2012). Thus, along with the issues of sluggish productivity growth, Singapore is likely to face the issues of inflation.

The productivity growth indicates the economic health of the country. When an economy has high productivity growth, it attracts foreign trade and investment thus enhancing the growth level of the economy. The economy is threatened by the debt-servicing problems, as the amount of the debt level of the households and the corporate sector were quite high. The household debt level was 75.3 percent while the corporate debt-level was 78 percent of GDP of Singapore, which is considered alarming. There has been a downturn in the property market of Singapore observed as a result of the poor productivity. According to Walras (2013), the slow nature of the productivity growth signifies that the restructuring would remain incomplete even by the end of the decade. Moreover, the situation can worsen if there is an unexpected recession in the economy.

However, one of the positive impacts of the poor productivity growth was the increase in the share of unemployment in the lower-productivity sector of Singapore. The number of part-time workers hired, who were lower skilled also increased. The productivity level influences the profit level at first and then with lags it affects the wage rate of the economy. During the situation where the economy is experiencing slow productivity growth, the firms are unable to pay the workers high as they have a risk of losing the market share. Rios, et al. (2013) stated that if the cost of production is lower than the increase in the productivity, there is a possibility of stability. However, in the opposite scenario, there is a chance of inflation. The low profits because of the low productivity growth hamper the generation of cash flow within the economy of Singapore. The trustworthiness for loans and equity investors are lowered thus decreasing the amount of investment. 

Ways to address the issues

The lower productivity and the slow growth trend results in the financial crisis in the economy of Singapore. The financial crisis leads to the fall in the aggregate demand for the goods and services in the economy. There are a number of factors that leads to the fall in the aggregate demand. There is the decrease in the lending of the bank because of the crisis in the credit and the shortage of the funds of the bank. As the bank decreases the lending, the consumer spending, and the investment reduces that further decreases the aggregate demand. The fall in the global growth is another important factor. As the economic growth experiences a downfall, the export pattern and world trade is also adversely affected and hence the aggregate demand is negatively affected (Blanchard & Leigh, 2013).

The fall in the aggregate demand due to the financial crisis causes the aggregate demand curve to shift towards the left or inwards. The supply of the goods and the services remaining unaltered in the economy causes the real GDP to decrease from Y1 to Y2.

As per the aggregate expenditure model, the increase in the unit of demand due to the decrease in the price level will cause the GDP or the economic productivity to increase at a significant level.

The increase in the aggregate expenditure of the economy will thus raise the productivity of the overall economy.

It is important that the government of Singapore looks into the issues in a serious manner as the low productivity of the economy and the sluggish growth rate affects the overall economy. The implementation of the fiscal policies will be a balancing act that the government will have to perform. From the report, it can be inferred that the government of Singapore tries to remain consistent with the restructuring, there will be a requirement for a more fiscal cost in the economy. As opined by Nagurney (2013), to handle the situation, it is important for the government to take appropriate fiscal policies. One of the effective measures is that the government should run the smaller fiscal surplus every year over the medium term. This will support in the process of generating more revenue. In order to implement this policy, the government can make the tax rate higher for the individuals who have the higher income.

The demand sided policies, and the supply sided policies can be considered in order to reduce the sluggish productivity growth issues and increase the productivity of Singapore. The demand sided policies are useful during the recession in the economy. The monetary policies, fiscal policies, and the devaluation are effective policies. greatly influence the economic activity. The central bank or the government of Singapore can cut the interest rate in order to boost up the aggregate demand. The low tax rate minimizes the cost of borrowing and thus increase investment and customer spending (Hornbeck & Moretti, 2015). As the disposable income increases for the customers, the aggregate demand of Singapore is likely to increase.

An economy can be described by the equation C + I + G + (Ex - Im). Thus, with the increase in these factors, the productivity growth or the GDP of the economy can be increased. The government has the power to tax that helps in controlling the revenue. Increasing the tax rate in this particular situation will decrease the disposable income since; the money is taken out from the household. The federal government of Singapore is capable of financing the budget deficit by borrowing funds from the financial market. However, Auerbach, et al. (2013) argued that the bond of the economy needs to be risk free for the investors to invest. The bonds can be backed by the taxing power of the government in order to make it risk free for the investors. 

The expansionary fiscal policy can significantly affect the gross domestic product or the GDP of Singapore with the help of the fiscal multiplier. The fiscal multiplier is the ratio of change in the national income to the change in the government spending. The enhanced effect on the national income caused when the multiplier exceeds one is known as the multiplier effect (Marrocu, et al., 2013). The effect of the multiplier increases when the initial amount of the government spending causes the income and the consumption of the individuals in the economy to rise. As the income and the consumption keep on increasing, the national income of Singapore will automatically rise. As per the economic model, it can be inferred that the increase in the aggregate demand will cause a change in the aggregate output of goods and services in such a way that it will become a multiple of the initial change. Kneese, et al. (2015) supported the model by stating that the multiplier effect acts as a value of government spending that helps to stimulate the aggregate demand of an economy. However, Buccirossi, et al. (2013) argued that sometimes the multiplier value has been observed to be less than one that results in the crowding out of few types of government spending in the economy.

The elasticity of the aggregate supply curve also affects the outcome of the multiplier largely.

The above figure states that when the aggregate supply curve of the economy is highly elastic as in figure a, the multiplier effect is likely too much high. On the other hand, in a case of aggregate supply that is inelastic, the effect is relatively less as it becomes difficult for the AS to expand accordingly in order to meet the rising AD (Van Ark, et al., 2013). Thus, it can be inferred that the application of the multiplier effect needs to be carried out by carefully analyzing the economy.

Devaluation is an effective tool for the economy when it is stuck in a fixed exchange rate. The domestic demand is increased, and the competitiveness is restored in the economy. As the exchange rate falls, the export becomes cheaper while the import becomes more expensive (Fuglie, 2012). Thereby, the economy achieves an advantage to increase productivity.

The supply sided polices are used to achieve long term productivity growth in the economy and the efficiency of the economy

Croce, et al. (2013) argued that lowering the income tax increases the initiative of the workers to work more and thus increase the labor supply. The cut in the tax level has both income and substitution effect. However, Petrin & Levinsohn (2012) stated that reducing the basic rate of income tax have a have very nominal influence on labor supply.

Very directed work markets, with intemperate control may debilitate firms from utilizing specialists and setting up in any case. It is argued that some nations have an excessive amount of work market limitations, for example, cost of terminating specialists, most extreme working week and least wages. More adaptable work markets can be beneficial in offering long term boost to speculation. Bowen & Finegan (2015) further debated that there exist trade off. More adaptable work markets could expand work infirmity and prompt to unsafe impacts on work efficiency.

Poor relation with the workers led to fall in the productivity. The adversarial attitude causes difficulty in labor efficient production processes (Jorgenson, et al., 2016). Therefore, in order to increase the labor productivity, the power of trades unions has to be reduced.

Privatizing industries can expand proficiency as private firms have more prominent benefit motivations to cut expenses and support profitability (Shaw, 2016).

Conclusion

From the overall study of the article, it can be inferred that Singapore faces the sluggish productivity growth mainly because of the slow global growth, aging population, looming US rate hike. The reason for the hindered development of the economy of Singapore has been the disappointment of the reproduction drive to support up to the development of the financial profitability. The usage of the diverse plans that could help the associations to enhance their efficiency has not been adequately completed. Since of these issues, the economy is debilitated by the obligation overhauling issues as the measure of the obligation level of the family units and the corporate division was very high. Nevertheless, one of the positive effects of the poor efficiency development was the expansion in the share of unemployment in the lower-profitability segment of Singapore. The quantity of low maintenance laborers employed, who were low skilled additionally increased. The lower efficiency and the poor growth trend bring about the budgetary emergency in the economy of Singapore. The monetary emergency prompts to the fall in the total interest for the products and enterprises in the economy. The demand sided, and the supply sided policies can be considered in order to reduce the impact of the poor productivity growth and further increase the productivity.

References

Auerbach, A., Chetty, R., Feldstein, M. & Saez, E. e. .. .. .., 2013. Handbook of public economics (Vol. 5). s.l.:Newnes.

Balatsky, E. & Ekimova, N., 2012. Fiscal Policy and Economic Growth.. Problems of Economic Transition, 54(12), pp. pp.55-70..

Blanchard, O. & Leigh, D., 2013. Growth forecast errors and fiscal multipliers. The American Economic Review, 103(3), pp. pp.117-120.

Bowen, W. & Finegan, T., 2015. The economics of labor force participation.. s.l.:Princeton University Press..

Buccirossi, P. et al., 2013. Competition policy and productivity growth: an empirical assessment.. Review of Economics and Statistics, 95(4), pp. pp.1324-1336.

Croce, A., Martí, J. & Murtinu, S., 2013. The impact of venture capital on the productivity growth of European entrepreneurial firms:‘Screening’or ‘value added’effect?. Journal of Business Venturing, 28(4), pp. pp.489-510.

De Grauwe, P., 2016. Economics of monetary union. Oxford university press.. s.l.:s.n.

Ehrenberg, R. & Smith, R., 2016. Modern labor economics: Theory and public policy.. Routledge: s.n.

Fuglie, K., 2012. Productivity growth and technology capital in the global agricultural economy. Productivity growth in agriculture: an international perspective. Wallingford, UK: CAB International.

Hornbeck, R. & Moretti, E., 2015. Who Benefits from Productivity Growth? The Local and Aggregate Impacts of Local TFP Shocks on Wages, Rents, and Inequality. s.l.:Mimeo.

Jorgenson, D., Gollop, F. & Fraumeni, B., 2016. Productivity and US economic growth (Vol. 169). s.l.:Elsevier.

Kneese, A., Ayres, R. & d'Arge, R., 2015. Economics and the environment: a materials balance approach. Routledge: s.n.

Marrocu, E., Paci, R. & Usai, S., 2013. Productivity growth in the old and new Europe: the role of agglomeration externalities.. Journal of Regional Science, 53(3), pp. pp.418-442.

Nagurney, A., 2013. Network economics: A variational inequality approach (Vol. 10).. s.l.:Springer Science & Business Media.

Petrin, A. & Levinsohn, J., 2012. Measuring aggregate productivity growth using plant?level data.. The RAND Journal of Economics,, 43(4), pp. pp.705-725.

Rios, M., McConnell, C. & Brue, S., 2013. Economics: Principles, problems, and policies. s.l.:McGraw-Hill.

Shaw, C., 2016. Fiscal Policy and Economic Growth. s.l.:s.n.

Tietenberg, T. & Lewis, L., 2016. Environmental and natural resource economics.. Routledge: s.n.

Van Ark, B., Kuipers, S. & Kuper, G. e., 2013. Productivity, technology and economic growth.. s.l.:Springer Science & Business Media.

Walras, L., 2013. Elements of pure economics. Routledge.

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